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Multi-Level Marketing vs Pyramid Schemes: Any Difference?

Last Updated on July 21, 2022 by Matt Zavadil

If you’re like most network marketers, you:

Mentally “tap out” when a prospect says, “Is this one of those MLM pyramid schemes?”

Result?

You’re outta the game b4 you have a chance to sit at the top of the pyramid (sorry, couldn’t resist LOL)

You may have heard the term “multilevel marketing” before, but you’re not sure what it is.

You’ve also heard of pyramid schemes and may be wondering if MLM is just another name for this type of scam.

In this article, I’ll explore the differences between MLM and pyramid schemes.

ll’I help you to understand what these terms mean and how to tell them apart.

So, is multilevel marketing a pyramid scheme?

The short answer is no: MLM companies selling valid products are not pyramid schemes.

What Is Legitimate Multi-Level Marketing?

Multi-level marketing is a type of business model in which companies sell products through a network of independent distributors.

The distributors earn commissions for selling the products and also for recruiting new members to join the network.

This structure is sometimes referred to as a “downline.”

What Is An Illegal Pyramid Scheme?

So, what is a pyramid scheme? A pyramid scheme is an illegal business model in which participants only make money by recruiting new members into the scheme.

There is no product or service involved, and the only way to make money is to get other people to sign up.

Pyramid schemes are often disguised as legitimate businesses, such as MLM companies.

However, there are some key differences that you can look for to tell them apart.

The Bottom Line

MLM is not a pyramid scheme. MLM companies aren’t pyramid schemes because they use independent contractors to increase the company’s retail sales.

Pyramid schemes are illegal, and you can lose your entire investment in them. If something sounds too good to be true, it probably is.

Do your research before signing up for any opportunity and be sure to ask lots of questions.

How Come So Many Link MLM to Pyramid Schemes?

If network marketing is a legal business structure, you might wonder why you hear people accusing MLM companies of operating as pyramids.

You might even hear about lawsuits regarding the topic.

Why all the confusion?

Basically, it’s because most people refuse to look at all the facts before jumping overboard with these types of claims.

As well, most people who don’t get good results trying to make money with multi-level marketing (MLM) businesses tend to place blame everywhere except with themselves.

Instead of realizing they need to improve their business-building skills, they say it must have been a scam.

Interestingly, these claims of “scam” exist within companies where others are making money.

I see people using high-pressure sales tactics in the MLM industry who wonder why others run away from them. At the same time, others in the same lawful MLM program make more than most distributors after learning expert sales and marketing skills.

What Skills Do Most People Lack?

Those who claim to lose money while operating within a legitimate MLM business typically lack the following business-building skills:

  • Prospecting
  • Closing
  • Sponsoring

If you are missing skills such as these, you will likely struggle when attempting to build a business.

MLM is not a “get rich quick” scheme. It takes hard work and dedication to succeed. However, with the right training and tools, anyone can be successful.

Inside these three skills exist more skills that most people in MLM lack.

  • Communication skills
  • Sales skills
  • Problem-solving skills
  • Leadership skills
  • Time-management skills
  • Product knowledge
  • Skilled at generating MLM leads
  • Understanding the correct MLM scripts to use

Just because you may be good at one or two of these things, doesn’t mean you’ll be successful in MLM.

You need to have a combination of skills to make it work.

For example, you might be a great salesperson.

If you don’t know how to prospect, then you’ll run out of people to sell to.

The same is true for the other skills I’ve listed.

You need all of them working together for your business to be successful.

If one skill is lacking, it will drag the others down and eventually lead to failure.

Tell Me the Best Way To Recognize Pyramid Schemes

The easiest way to recognize a pyramid scheme is by its lack of a product or service.

If the company is only recruiting people for the opportunity and not selling a product, it’s likely a pyramid scheme.

All valid businesses sell a product, including MLM companies.

How Can I Recognize Multilevel Marketing?

To recognize a legitimate MLM company, look for the following:

  • Products or services being sold
  • Bonuses and incentives based on product sales rather than simply recruitment numbers
  • Training and support provided to help distributors build their businesses

Also, look for a compensation plan that pays commissions on sales volume generated by a downline, as opposed to payments made simply for “signing up” new members.

These are just a few of the many factors you can use to determine if a company is legitimate or not.

Again, be sure to do your own research and ask lots of questions before signing up for any opportunity.

Remember, there is no such thing as an easy way to get rich.

Is MLM illegal?

Not at all. MLM is a legal business model.

How many MLM companies do you know about where they don’t ask you to sell a product?

Most of the time, all the excitement revolves around the products.

How Do MLM Participants Make Money?

It’s pretty simple. They sell products and services to customers and earn a commission on their sales.

In some cases, they also earn a commission on the sales of other people they’ve recruited into the business (their “downline”).

The more people they recruit, and the more product those people sell, the more money the original distributor will make.

Again, there’s nothing wrong with this.

It’s similar to a real estate or insurance brokerage, where the broker earns an override commission on the sales of their agents.

MLM Compensation Plans

There are three basic compensation plan types inside multi-level marketing companies.

  • The Matrix Plan
  • The Unilevel Plan
  • The Binary Plan

Matrix: The matrix is a “forced” structure that pays commissions on a set number of levels.

Unilevel: The unilevel plan is the most common type of compensation plan found in MLM. It pays commissions on an unlimited number of levels.

Binary: The binary plan is the second most popular type of compensation plan found in MLM. It is similar to the unilevel plan, but pays commissions on only two levels.

Which Plan is Best?

There is no “best” plan. It depends on the company and its products.

Some plans work better with certain products than others.

For example, the binary plan may be a better fit for products that can be sold in large volumes, such as nutritional supplements, weight-loss programs, or energy drinks.

The unilevel plan is a better fit for products that are more expensive and may require more explanation and demonstration, such as home security systems, luxury vacations, or high-end fashion accessories.

Again, it all comes down to the products being sold and the target market of the company.

The Bottom Line

Multi-level marketing is a legal, valid business model. It is not one of those illegal pyramid schemes so many people try to claim it to be.

Pyramid schemes are illegal and don’t have any products or services to sell.

FAQs About MLM Companies vs Pyramid Schemes

You may still have a few questions. Let’s answer those.

Is multi-level marketing a legitimate business?

Yes, MLM is a perfectly legal business model.

What is the difference between pyramid selling and MLM?

Pyramid schemes are illegal. MLM is not.

In pyramid schemes, you make money by recruiting new members into the scheme. With MLM, you make money by selling products to customers. You also make money by recruiting others to sell those products (you don’t make money to recruit them).

What is the difference between an MLM and a network marketing company?

There is no difference. They are both the same thing.

Do all MLM companies require you to recruit others to make money?

No, not all MLM companies require you to recruit others. However, the more people you recruit, and the more product those people sell, the more money you will make.

Can I make a lot of money in MLM?

It is possible to make a lot of money in MLM. But it is not easy. Like any business, it takes hard work, dedication, and perseverance.

What is the difference between direct selling and MLM?

Direct selling is the sale of products and services to customers through personal contacts, such as home parties. MLM is a type of direct selling. In all actuality, there’s no difference at all between the two.

Is network marketing and multi-level marketing the same?

Yes, they are the same thing.

Is MLM a legitimate business model?

Yes, it is a perfectly legitimate business model. An MLM company offers real products for sale, which distinguishes it from a pyramid scheme.

Final Thoughts: Is Multilevel Marketing a Pyramid Scheme?

There you have it.

You can safely join an MLM business that legitimately sells a real product to consumers.

The Federal Trade Commission won’t hop in and spoil the party.

Does that mean you won’t lose money getting involved with direct sales?

Of course not, you need to develop a winning MLM strategy that involves getting good at selling products and recruiting new distributors as part of your sales force.

Join a legitimate business opportunity, focus on selling your multi-level marketing company’s products, stick to promising only what’s in the company’s sales literature, and you should be just fine.

Get good at sales and marketing and you might just create customer satisfaction, attract plenty of new distributors, and make the most of an amazing business opportunity.

Bottom line: A multi-level marketing company doesn’t equate to a pyramid scheme.